The New Wave in Real Estate Investment: Single-Family Rental Homes

Pretium Partners’ Dana Hamilton reveals how the sector is following a growth path similar to that of multifamily, with residents attracted to benefits such as more privacy, efficient services and modern amenities. As the trend develops, institutional investors are craving a piece of the pie.

Pretium Partners is planning to expand its portfolio in new markets as well as consolidate its footprint.

Investors’ interest in the single-family rental sector is surging. Research by Amherst Capital shows that purchases by institutional investors increased by 60 percent in 2017 compared to the previous year—the first rise since 2013. The trend is expected to continue, as 2018 is shaping up as a strong year for this asset class. In July, Pretium Partners announced it closed Pretium Residential Real Estate Fund II with more than $1 billion in equity. It was the company’s second fund for single-family rental home investment; Fund I, which closed in 2013, raised $1.2 billion. Amherst Holdings is also aiming to reach the $1 billion threshold through a new fund, while Tricon Capital Group Inc. and Cerberus Capital Management have announced targets of $750 million and $500 million, respectively.

“What we are seeing is the very early stages of the institutionalization of a massive real estate asset class,” Dana Hamilton, head of real estate at Pretium, told Multi-Housing News. The company established Progress Residential in 2012 to leverage the opportunities it identified in this segment. At that time, there was “an emerging gap between the burgeoning demand for individuals and families to live in attractive neighborhoods in quality single-family homes and the undersupply of those homes,” Hamilton added. The constricted lending environment for home purchases only supported the emerging single-family rentals sector.

The single-family homes market seems to be doing better than ever if we look at vacancy rates, for-sale inventory and prices. Is there room for more growth?

Hamilton: Demand in our single-family rental markets continues to be strong, as evidenced by Progress Residential having maintained an overall stabilized occupancy rate of 96 to 97 percent throughout the year. Nonetheless, we see opportunities for growth in rental rates, as we explore the value of an institutionally managed product in a marketplace historically run by mom-and-pop owners and operators. We also see opportunities to generate additional ancillary income, as the single-family rental industry begins to provide value-added services and amenities to customers, much the way that we have seen multifamily do over time. Further, we continue to be excited about the opportunity to increase the size of our portfolio within our markets in 2018 and beyond.

What are residents looking for when they are scouting for a home to rent? What are Millennials looking for in a home?

Hamilton: Our residents are attracted to the locations, amenities, quality homes and services we offer to individuals and families. Our homes are typically three-plus bedrooms and two-plus bathrooms with a two-car garage and a private yard. These homes are generally located within homeowner associations in safe neighborhoods with good schools, within a half-hour commute of major employment centers. Our average home was built after 2001, offering modern floorplans and amenities.

At Pretium, we have purposefully constructed our Progress Residential portfolio with Millennial households top of mind. The average Millennial is 29 years old, with the oldest now 36. They are in or entering the period of life where they are establishing households and having children. We believe high-quality rental housing in sought-after neighborhoods with good schools and reasonable commutes offers a very attractive housing solution for these residents.

The homes owned by Pretium typically include three+ bedrooms, two+ bathrooms, a two-car garage and a private yard.

What role does technology play in the single-family homes investment business? How does Pretium leverage technology to increase revenue?

Hamilton: Modern technology enables our business at every step in the value production chain. It takes less than two hours from the time a home that fits our “buy box” hits the multiple listing service to our making an offer to purchase that home. Technology also allows us to lease our homes more efficiently, utilizing targeted lead generation (search engine marketing and optimization), sophisticated pricing and revenue management practices, and an integrated outcome-based scoring model. Together, these data-driven and technology-enabled systems drive operating margins by minimizing leasing timelines and maximizing revenues within the context of individual markets and submarkets. Further, our service teams utilize technology for scoping renovations, scheduling service personnel, replenishing inventory and continually refining our operations and the level of service we are able to deliver to customers.

Tell us about the challenges in the single-family homes market. How can these challenges be overcome?

Hamilton: The operational challenge is the time and space between homes. The solution has been to aggressively invest in and utilize technology to diminish the importance of proximity. One example has been the widespread utilization of smart entry to enable prospective residents to show themselves in homes in which they are interested, without having to coordinate with a leasing associate. At Progress (Residential), empowering residents to “Show Yourself In” resulted in our nearly doubling the number of leads that converted to showings. Similarly, on the service side of the business, the utilization of highly specified and technology-enabled fleet vehicles has enabled Progress to service a greater number of homes more efficiently—and with greater customer satisfaction.

Pretium continues to invest in 15 Sun Belt and Mid-Atlantic major metropolitan areas that have strong growth and favorable tax policies.

Hamilton: With SFR Fund II, Pretium is doing more of the same of what we did with SFR Fund I, but better. We are an organization obsessed with utilizing data to continually improve our operations and the value we deliver to investors. Not only have we increased the efficiency with which we acquire our single-family rental homes but we have also consistently improved as operators. In 2014, our core NOI operating margins were in the mid-40s, whereas today we operate in the mid-to-high 60s—very much in line with best-in-class multifamily operators—and we continue to see room for improvement.

What markets is the fund targeting?

Hamilton: Pretium continues to invest in 15 Sunbelt and Mid-Atlantic major metropolitan areas that we have selected for their above-average population and employment growth, favorable state and local tax policy, as well as housing affordability. We believe these factors have and will continue to attract in-migration and employer expansions/relocations that benefit local housing demand and regional economic growth.

How have the recent changes in the economy and legislation impacted the single-family rental sector?

Hamilton: The U.S. economy is performing well, with healthy job growth and wage growth benefiting household incomes. Recent tax reform should provide additional after-tax income to households (lower rates, doubling of the standard deduction), which is a positive for affordability whether residents rent or own. With respect to our single-family rental business, it is our view that by doubling the standard deduction, the new Tax Code lowers the economic incentives for owning the lower-priced “starter” homes that Progress typically rents.

In addition, by limiting the state and local tax deduction to $10,000, we expect to see continued movement of households out of high-tax states into lower tax states. Lastly, mortgage credit availability for prospective homebuyers remains more constrained today than in the previous housing boom. We believe that tighter lending standards, coupled with rising non-mortgage debt burdens for U.S. households, will lead to a greater percentage of households renting going forward than we have seen in prior generations.

What are your predictions for the single-family home sector going forward? What trends and challenges should we look out for?

Hamilton: What we are seeing is the very early stages of the institutionalization—in terms of both ownership and operations—of a massive real estate asset class. Of more than 16 million single-family homes for rent, less than 2 percent are owned by institutions today, whereas 85 percent of single-family rentals are held by owners with 10 or fewer homes. Single-family rentals are developing in much the way that multifamily did—but at a much more rapid pace due to the availability and accessibility of technology solutions. We expect the larger institutional platforms that have made significant investments into people, technology and serving customers will continue to gain market share over time.